Business

After Years of Unrest, Egypt’s Startup Ecosystem Is Booming

As clashes between Egyptian soldiers and protesters left dozens dead in October 2011, Ahmed Zahran was betting his savings on converting the water pumps used by farmers from running on diesel to solar energy.

The 33-year-old spent 65,000 Egyptian pounds ($9,400) starting KarmSolar with three friends and landed the first client last year in Egypt’s Western Desert as fuel shortages worsened. Almost 9,000 other companies were set up in the 12 months to June this year, the most since Egypt began publishing statistics on startups in 2004.

“A lot of people like us, young people, became risk takers after the revolution because they realized they had nothing to lose,” Zahran said in an interview in Cairo.

Contradicting Egypt’s image as a country at a standstill after almost three years of political upheaval, the proliferation of enterprises reflects a nation looking for new ways to subsist amid the worst economic slump in two decades and record unemployment.

As well as the burgeoning official list of companies, there is a jump in the number of unregistered startups, said Chahir Zaki, assistant economics professor at Cairo University.

Small businesses are the only “outlet that could absorb” the growing number of unemployed, said Zaki. Informal businesses will increase because of “the lack of vision at the national level and the lack of law enforcement,” he said.

Market Rally

The official jobless rate in Egypt rose to a record 13.3% in June. Economic output has grown about 2% a year since the 2011 revolt that ended President Hosni Mubarak’s three decades in power. That compares with 6.2% average annual growth in the last five years of his rule.

While Egypt’s EGX 30 Index was the seventh-best performer in the third quarter among 94 stock-market gauges tracked by Bloomberg, gaining 18%, it’s still down 16% since the start of the 2011 uprising against Mubarak. The yield on the government’s benchmark 5.75% Eurobonds due in April 2020 has plunged 288 basis points since June to 7.27% today. That compares with 5.66% before the 2011 revolt.

KarmSolar thrived during the turmoil that plagued former President Mohamed Mursi’s only year in office. His rule was ended by the military in July, leading to renewed violence as the Muslim Brotherhood, his primary supporters, staged nationwide demonstrations.

‘Smart Money’

After partnering with Princeton-based WorldWater & Solar Technologies to develop its pumps, KarmSolar turned to building Egypt’s first farm compound to rely entirely on solar energy, a housing and living area for 500 workers. The company, which finalized raising 13 million pounds from private investors in September, quadrupled the size of its workforce over the past year and plans to break even earlier than its target of 2016.

“People used to laugh at our product, but the fact that someone took a chance on us shows we’re part of the cleaning of old money and old ideas with new, smart money,” said Zahran, who used to manage carbon credits for Royal Dutch Shell Plc.

The growth in the ranks of entrepreneurs during economic hardship is also reflected elsewhere. Gross domestic product in Spain has shrunk for nine consecutive quarters and unemployment is at 26%. Yet there was an 8.2% increase in the number of companies created in the first half of 2013.

The Egyptian government doesn’t publish statistics on the number of startups that fail and, while some young companies go on to attract venture capital or even list on the stock market, others are just trying to stay in business.

Rethinking Plans

Dina Abou El Soud founded a downtown Cairo hostel in 2009 when the economy was growing at more than twice the pace than now. Her occupancy rate has dropped to 5% as television pictures of violence put off would-be tourists. Since June, Egypt has been hit with flight suspensions by Thomas Cook Group Plc. and Tui Travel Plc., which have yet to be fully lifted.

“I was thinking of developing the hostel to become a three-star hotel,” said Abou El Soud, who instead might turn it into furnished apartments. “I had bigger plans in my head and I had a lot of ideas and energy. Now I feel handcuffed.”Persistent civil unrest is forcing other entrepreneurs to rethink their investments.

The government crackdown on Islamists following Mursi’s ouster left more than 1,000 people dead in August alone and hundreds in jail. According to the military’s plan, Egypt will get a new constitution, parliament and president by next year. Mursi’s backers have refused to participate in the process and continue to hold near-daily protests.

More Violence

For Wasalny, a mobile-based application that helps drivers avoid heavy traffic, expanding outside Egypt is a priority to keep the business alive despite landing a deal this year with the local unit of Emirates Telecommunications Corp., the Middle East’s biggest mobile phone company by stock market value.

“The political instability this time around is different because of the scale of violence we’ve seen,” said Chief Executive Officer Salem Korayem. “We’re very concerned about revenue generation in this climate. Investors are probably going to become even more conservative going forward.”

Against that backdrop, more people like Zahran at KarmSolar are choosing to leave jobs and navigate the deterioration in the economy either by starting or joining a new company.

Talent Pool

Ideavelopers, Egypt’s biggest venture-capital fund and a unit of investment bank EFG-Hermes Holding SAE, invests in 17 mostly technology companies, five more than before the anti-Mubarak uprising, said Tarek Assaad, a managing partner.“The economic slump has provided startups access to a lot of very talented people,” said Assaad, whose firm manages 265 million pounds. “Entrepreneurship in Egypt today attracts higher quality talent than it did in 2008 or 2009, at the level of both founders and professional hires.”

Investments include Fawry, a 2008 startup that facilitates electronic bill-payments in urban neighborhoods. The World Bank’s investment arm, International Finance Corp., bought an 18% stake in the company in February.

Although potential improvement on the political and economic fronts may help encourage innovation, entrepreneurs need to see more success such as the 2009 acquisition of Jordan’s Maktoob.com Inc. by Yahoo! Inc., said Assaad.

The $175 million deal helped boost tech startups in the country that accounted for three-quarters of Arabic-language Internet content last year, according to Geneva-based International Telecommunication Union data.

“If you’re a talented engineer, you need to see examples of others like you that have made a ton of money to encourage you to start your own company,” said Assaad.

At KarmSolar, Zahran said he’s still busy developing the business. The company secured contracts to install 400 kilowatts of power this year compared with 50 kilowatts in all of 2012. Its farming compound is on track to be completed in March.

“The way things are being shaken up, it means only the good companies will survive,” Zahran said. “We tapped into people’s need for reliability by providing power and others are doing the same in their fields. This is why I think we’re going to see a qualitative boom in startups over the next five years or so. And it’s about time.”

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